Defining the fair representation of financial statements Essay

The Financial Reporting Standards Board was formed to decide the jobs faced by the international fiscal coverage regiment. In peculiar, it hopes to advance the standardisation of international accounting criterions through its International Accounting Standards ( IASs ) to ease minutess and better fiscal markets. Underscoring the FRSB ‘s doctrine is to enable the ‘fair presentation ‘ of fiscal statements. This study discusses this construct and evaluates whether the application of a standardised accounting coverage regiment would accomplish its aims with a critical scrutiny of some accounting criterions.

Whenever we mention the ‘fair presentation ‘ of fiscal statements, we are mentioning to the accounting construct of ‘true and just ‘ position. The phrase ‘true and just ‘ in an accounting context does non hold the same significance as true and just in a general context. Therefore, ‘true ‘ in an accounting context does non intend in conformity with the facts or non false and ‘fair ‘ in an accounting context does non intend merely or indifferent.

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The most by and large recognized reading of true and just in an accounting context is that histories are true and just if they are prepared and presented in conformity with by and large accepted accounting rules. Therefore tribunals have held that histories based on historical cost show a true and just position. Riley has pointed out that the assorted Companies Acts require the presentation of a true and just position and non the true and just position. The deduction is that in a peculiar circumstance no individual position is true and just but that there are several positions each of which is true and just.

Presumably, any by and large accepted accounting method provides a true and just position. There are some who argue that different accounting criterions does non suppress the acceptance of just presentation while others believe that a unvarying international criterion like IAS is the best agencies of accomplishing just presentation of fiscal statements. It has been argued by some that a scope of accounting methods is desirable because of the diverse fortunes of different concerns. In some fortunes one method would be desirable and in other fortunes some other method would be most appropriate.

Diverse accounting methods are necessary because of diverse fortunes. For illustration, it could be argued that when a non-controlling involvement in another company is acquired and where there is a significant influence over its policies, the equity method would reflect the fortunes more accurately than merely demoing the investing at cost. Given a assortment of accounting methods, it is argued that direction should take the one which best reflects the alone fortunes of the state of affairs.

The ability to take the most appropriate method should take to comparison of accounting studies. More meaningful comparings would be possible because accounting studies reflect the fortunes in each instance. The independent hearer should guarantee that direction selects the most appropriate method for the presentation of a true and just position. If direction does non take the best method, the hearer will non corroborate the presentation of a true and just position and a qualified audit study should ensue.

Merely as there are many obliging statements in favor of IAS, there are besides every bit obliging statements against it. One of the major unfavorable judgments against IFRS is that ill developed and developing states view it as a signifier of infliction of regulations or neo-colonization by economically superior states ( Mednick, 1991 ) . Second, standardisation goes against the inherently flexible nature of accounting. One of the cardinal rules of accounting is substance over signifier, so supplying international criterions would be contrary to this.

When accounting regulations are standardized or harmonized, they can non perchance be flexible adequate to suit into the tremendous range of different national state of affairss, legal systems, phases of economic growing and cultural differences. Alternatively of helping advancement, such stiff and inflexible criterions may really impede it. Next, some experts argue that it will be really hard for international accounting criterions organic structures like the IASB to make a cosmopolitan consensus on some issues.

As a consequence, grants and via medias will hold to be made so that it becomes acceptable to the international community ( Berton, 2000 ) . When this happens, the criterions go unequal and permissive. Another statement against international accounting criterions is that it could be unsafe as the criterions may gnaw net incomes and cause volatility in the balance sheets of the companies ( Parker, 2002 ) . As a consequence, companies need to educate their investors about the effects of international accounting criterions on the reported net incomes and liabilities.

Finally, some have expressed concern that international standardisation or harmonisation may do “ standard overload ” . Companies that have to cover with societal, political, national and economic force per unit area will be overextended to follow with the more complex and expensive international demands. This may add to runing costs. There is the handiness of a broad pick of accounting methods. For many minutess, comptrollers are able to take from a choice of accounting methods each of which is every bit acceptable and which frequently give widely different consequences.

However, there are two chief types of unfavorable judgment leveled against this sort of diverseness. One, it is suggested that the handiness of several acceptable alternate accounting methods for a individual dealing could do the accounting studies of different companies non-comparable. Differences in reported consequences could reflect different accounting processs instead than different public presentations. For illustration, say that Company A expensed all research and development outgo, used FIFO for stock list and depreciated its assets on a straight-line footing.

Any differences in the reported net incomes and balance sheets of the two companies would be due, at least in portion, to differences in accounting processs and any appraisal of comparative public presentation and fiscal place would be hard to do. The critics argue that diverseness in accounting methods cut down the public-service corporation of accounting studies by mensurating corporate public presentation in different ways. Two, it is besides suggested that the handiness of different accounting methods allows direction to take those methods which give the coveted consequence.

In other words, net incomes could be manipulated by the pick of accounting method. If direction wants lower net incomes, conservative accounting processs could be used. Choosing accounting processs to fulfill direction aims is sometimes described as originative accounting. In America, research workers have found significant grounds of originative accounting. The critics regard originative accounting as peculiarly bad and conclude that fiscal statements can non be used with any assurance to mensurate or compare managerial public presentation.

The common component of these two unfavorable judgments is that the handiness of a pick of accounting methods leads to a deficiency of comparison in accounting studies. The 2nd statement for IAS is to seek increased revelation. Two types of increased revelation are suggested. One, it is argued that the jobs of diverseness could be at least partly overcome by elaborate revelation of accounting method. Under this proposal, accounting studies would include a statement of the methods used to calculate depreciation, unearned income, stock list and so on.

It is suggested that this extra information would enable statement users to recast the accounting studies into a signifier suited for comparing with the studies of other old ages or other companies. Two, it is suggested that where an accounting method is different from that used in the old study, the fact of the alteration of method and the consequence of the alteration on reported net incomes or balance sheet points should both be disclosed. With this extra information statement users would be able to repeat the accounting studies of a company to do them comparable on an taken footing.

The consequence of originative accounting would be disclosed. It should be noted that the increased revelation response leaves companies and their hearers with a pick from a scope of accounting methods. Diverseness in accounting method is non reduced. The increased revelation allows statement users to do accounting studies comparable by recasting them in the signifier they need. Increased revelation is a solution to the job of diverseness can be criticized on the evidences that the benefits may non be shared every bit by all statement users.

It requires a statement user with accounting accomplishments to recast fiscal studies on a comparable footing. Statement users without entree to these accomplishments would have no benefits from these extra revelations. Indeed, they may be worse off as sophisticated statement users recast the fiscal studies and to do better determinations. Any solution to the diverseness job which places the 1 on statement users and which could therefore discriminates against a group of users is clearly unsatisfactory.

It is besides widely believed that a cosmopolitan acceptance of IAS would lend to uniformity of fiscal statements internationally. When different criterions are used, it is sometimes hard to compare the fiscal public presentation of two companies. Comparability would extinguish misinterpretations about the dependability of foreign fiscal statements and would take one of the most of import hindrances to the flow of international investing. Narrowing the scope of pick of accounting methods is normally described as increasing uniformity.

In most instances, increased uniformity is achieved by publishing statements of accounting rules or criterions which specify the accounting method for a peculiar dealing or event. Increased uniformity means that the same accounting methods are likely to be used in the same fortunes by different companies and at different times. The burden is on direction and comptrollers instead than statement users. There are several statements used to back up the instance for greater uniformity of accounting method.

First, the most of import statement is that uniformity of accounting processs will let comparings of accounting studies. Similar state of affairss will be reported in a similar manner and consequences will be straight comparable. Any difference in reported consequences will be due to differences in the fortunes and non in the accounting method. Second, many comptrollers believe that increased uniformity would do their occupations much easier. Choosing an accounting process is for many comptrollers clip devouring and hard.

It may take to conflict between direction which wants originative accounting and comptrollers who believe that another method is more appropriate. With uniformity, the opportunity of struggle over accounting method would be reduced. Third, with uniformity, comptrollers would be better able to support their processs in tribunal. Because their picks would be limited, they could non be accused or taking an accounting method to run into the demands of any peculiar group. This in an of import consideration for comptrollers.

There are legion fiscal benefits of holding IAS. The first is that it decreases the cost of informations aggregation ( Choi et al, 1999 ) . Time and money will be saved on consolidating divergent fiscal information when more than one set of studies is required to follow with the different national Torahs or pattern. Second, it is believed that the easiness of comparing of information and the decreased cost of roll uping informations will assist spur the development of capital markets through the influx of foreign capital ( Don and Thomas, 1995 ) .

Investors, fiscal analysts and foreign leaders will be able to understand the fiscal statements of foreign companies and they would be able to compare the investing opportunities that will help them to do the right investing determination. This in bend will besides ease the motion of financess. As revenue enhancements are levied on the entire income of a concern, it would be of great aid to national revenue enhancement governments around the universe if net income was calculated on similar accounting rules and patterns. In add-on, this will supply houses with a competitory advantage.

International accounting and revelation criterions would do it easier to carry on the competitory and operational analyses needed to run a concern. It will besides go easier for top direction to pull off of import relationship with stakeholders such as clients and providers. Multinational corporations will profit the most and it will besides go easier for them to carry through the revelation demands for international stock exchanges. Finally, harmonisation of accounting criterions will diminish audit costs and increase the efficiency of the audit ( Choi et al, 1999 ) .

To better understand how cosmopolitan acceptance of IAS would extinguish differences in accounting intervention, allow us see some illustrations of divergent accounting intervention. For this intent, a comparing is made between IASs and the United States By and large Accepted Accounting Principles ( US-GAAP ) . Harmonizing to IAS 16 and IAS 38, there is an expressed judicial admission that changes in depreciation or amortisation method must be accounted for as a alteration in estimation.

However, US-GAAP dainties these alterations as alterations in policy by showing the cumulative consequence of the alteration in the income statement. These require retrospective alterations, which are non required by IAS. IAS 36 uses a discounted damage trigger, because the value in usage is by definition a discounted value. Reversal of damage losingss recognized in anterior old ages is allowed. On the other manus, in the US-GAAP, if the amount of the expected hard currency flows is less than the transporting sum of the plus, the entity shall acknowledge an impairment loss.

This means that the damage trigger is an undiscounted sum. Reversal of antecedently recognized damage losingss is prohibited for assets to be held and used. Harmonizing to IAS, the recoverable sum of a hard currency bring forthing unit should be compared with the transporting value of its net assets. Resulting impairment losingss should foremost be deducted from good will and so from other assets on a pro-rata footing. However, US-GAAP requires finding of the implied just value of the good will. If the implied just value is less than its transporting value, this transporting sum should be reduced.

Such a good will impairment trial can non impact the transporting values of other assets. For IAS, purchased in-process research and development that meets the acknowledgment standard for an intangible plus should be valued at just value. Even if it is non a separate identifiable intangible plus, the IAS method consequences in capitalisation of those costs as portion of good will. Under US-GAAP, purchased in-process research and development assets both touchable and intangible should be charged to write off at acquisition day of the month if no alternate hereafter usage for the assets can be determined.

Although IASs are deemed to better just coverage, there are occasional incompatibilities that frequently hamper their effectivity. Indeed, the IASB has tried to rectify some of these incompatibilities, but there are still flaws in the overall model. The followers are some of the incompatibilities that have been corrected in recent old ages. In some states, transportation companies are allowed to take to be taxed on the footing of tunnage transported, tonnage capacity or a fanciful net income alternatively of the standard corporate income revenue enhancement ordinances.

In the yesteryear, tunnage capacity was regarded as a footing for nonexempt income. This is based on a flawed premise. Income revenue enhancements are calculated on nonexempt net income which implies cyberspace, instead than gross sum. Taxes either on tunnage transported or tonnage capacity are based on gross alternatively of net sum. Therefore, such revenue enhancements would non be considered income revenue enhancements and would non be presented as portion of revenue enhancement disbursals in the statement of comprehensive income.

Some jobs arise among existent estate developers. IAS 2 does non allow selling costs to be capitalized as stock list if the existent estate units are considered to be stock list. However, other criterions conclude that some direct and incremental costs recoverable as a consequence of procuring a specifically identifiable contract with a client may be capitalized in narrow fortunes, for illustration in IAS 11 ( Paragraph 21 ) and IAS 18 ( Appendix 14 ( B ) ( three ) ) .

Hence, it is non possible to make a decision on the appropriate accounting for board classs of merchandising and selling costs in all fortunes. In conformity with paragraph 74 ( B ) of IAS 16, an entity is required to unwrap the sum of outgos recognized in the transporting sum of an point of belongings, works and equipment in the class of its building. Paragraph 79 ( a ) encourages an entity to unwrap the sum of belongings, works and equipment that is temporarily idle.

Paragraph 112 ( degree Celsius ) of IAS 1 requires an entity to supply in the notes information that is non presented elsewhere in the fiscal statements that is relevant to their apprehension. The revelation sing idle assets might be peculiarly relevant in the current economic environment. Therefore, IASB should reexamine all revelations encouraged with the aim of either corroborating that they are required or extinguishing them. To stop, all comptrollers agree that the just presentation of accounting and fiscal statements is of import.

However, what precisely constitutes ‘fair presentation ‘ is a combative and problematic affair. Some insist that following IFRS is the best manner of accomplishing this aim while others assert that substance is more of import than signifier and that it is absolutely acceptable to utilize different accounting criterions so long as it shows some signifier of ‘fair presentation ‘ . While I personally believe that it would be finally profit the international fiscal community to hold one criterion to forestall confusion, its execution is still some old ages off.